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Student Loan Industry Fighting to Avoid Extinction

It’s hard for competitors to speak with one voice when their industry faces extinction. And that’s exactly what competing constituencies within the private student loan industry are discovering as they scramble to preserve the way they do business.

The industry is responding to the president’s proposal in his 2010 budget to switch the federal student loan system entirely to the government’s direct student loan program, eliminating the “middlemen— of banks and lenders that critics say are inefficient and wasteful.

The diversity of the loan industry can be seen in its multiple trade associations, from the Consumer Bankers Association and the Education Finance Council to the National Council of Higher Education Loan Programs and the National Association of Student Loan Administrators.

Seeking to tie the industry together is America’s Student Loan Providers, a group that represents all the leading providers of college aid.

Layer onto those groups a K Street lobbyist for each lending company, as well as banks and guarantors that want to carve their individual slice of the pie, and you have a complicated but lucrative lobbying bonanza that is just warming up.

The nation’s largest student lender, Sallie Mae, recently engaged two prominent Democrats, bringing on Tony Podesta of the Podesta Group last month and Jamie Gorelick of Wilmer Hale in December, to push its own alternative to the president’s proposal before Congress and the administration.

Sallie Mae has taken pains to separate itself from those opposing the president’s plan, such as the Consumer Bankers Association, and to put forward its own hybrid approach that combines aspects of federal loan programs but would still, according to the company, near or match the savings estimated in the president’s plan.

“There are some participants fighting the president’s proposal,— Sallie Mae spokeswoman Martha Holler said. “We are not one of them. We want to work constructively with the administration and Congress.—

Lobbyists for the industry’s other constituencies, from nonprofit lenders to loan guarantors and major banks like Wells Fargo and Citibank, cry foul at Sallie Mae’s stance. They contend the company’s gentle response to the White House comes with one eye open toward a lucrative government contract that will remain even if the president’s plan is adopted.

“Sallie Mae is the 800-pound gorilla in the room,— a longtime industry lobbyist said. “They are looking to preserve their monopoly.—

The president’s proposal would end the Federal Family Education Loan program that since 1965 has allowed private companies to issue government-backed loans at a nice profit. Without this program, all loans would instead come directly from the government, with the estimated $94 billion in savings redirected to the Pell Grant program that serves the neediest students.

The loan industry questions the savings estimated in the president’s proposal and contends that making such a huge transition in such a short time would hurt the students that it intends to protect by shutting off competition, stifling innovation, adding to the national debt and resulting in poor service and fewer options for colleges and students alike.

The final 2010 budget resolution, expected to pass Congress today, includes reconciliation instructions for education reform that instruct the respective education committees in the House and Senate to achieve the $94 billion savings target in the president’s proposal and call for reforms that would make college more affordable.

With that potential for fast-track legislation in mind, each sector of the industry is using the window before specific legislation is introduced to outflank the other in explaining why its function in the loan process should be preserved.

Following on the heels of Sallie Mae, the National Council of Higher Education Loan Programs, the National Association of Student Loan Administrators, the Education Finance Council and various guarantee agencies are each expected to release their own proposals shortly.

“We haven’t seen anywhere near the final act in terms of lobbying,— said Stephen Burd, a senior research fellow at the New America Foundation. “This is just the overture.—

The trade associations spent a combined $960,500 on lobbying in the first quarter of 2009, according to Senate disclosure records.

Sallie Mae, on the other hand, spent $1.04 million in the first three months of this year, relying on ML Strategies, Global USA and the Podesta Group to lobby on its behalf. It dropped the law firm Patton Boggs in September of last year, according to Senate disclosure records.

Demonstrating the competitive edge that Sallie Mae holds, one of its main competitors, Nelnet, a Lincoln, Neb.-based private lender, spent just $170,000 on lobbying in the first quarter of 2009. Another competitor, Hartford, Conn.-based Student Loan Finance Corp., reported no lobbying expenditures so far this year, according to Senate lobbying records.

The stampede on K Street has been loud enough to reach the White House. In an event Friday with a family struggling to afford college, the president said, “The banks and lenders who have reaped a windfall from these subsidies have mobilized an army of lobbyists … They are gearing up for battle. And so am I.—

Complicating the industry’s response to the president is that the groups were seemingly caught off guard by his proposal and the willingness of Democrats in Congress to preserve their option to fast-track student loan initiatives through the budget process.

“If the industry all had the same position, they might be stronger,— said a lobbyist working with Sallie Mae. “Clearly they were not expecting the issue to move with the rapidity it has or to be such a dramatic proposal.—

Early in his presidential campaign, Obama called for eliminating the FFEL program but did not highlight the issue during the general election or his presidential transition.

In fact, the first warning shot to the lending industry came in late January on the White House Web site under the “End Wasteful Government Spending— section. The words “elimination of subsidies to the private student loan industry— were quietly tucked between calls to end subsidies to oil and gas companies and to tackle wasteful spending in Medicare.

One thing uniting the groups is the acknowledgement that they have to do a better job letting policymakers and the public know about the losses that they say will come if their services are eliminated, including 30,000 industry jobs and the loss of innovation that comes from market competition.

“This is a 45-year-old program that serves almost 5,000 schools and six million borrowers per year,— said one lobbyist for the private lending industry. “We haven’t convinced people what will happen if the lights are turned out.—

Sallie Mae took a very visible step in addressing that problem, dispatching CEO Albert L. Lord to the company’s loan center in Wilkes-Barre, Pa., earlier this month for a town-hall meeting to announce the return of 2,000 jobs that were sent overseas in 2007. Standing by his side at the meeting were two Democratic lawmakers from the state, Sen. Bob Casey and Rep. Paul Kanjorski.

The recognition that, despite competing interests, the industry’s stakeholders are on the same page, gives hope to those seeking common ground.

“When you have something on the table to kill your industry, people react to that,— said Kevin Bruns, executive director of America’s Student Loan Providers. “But as legislative deadlines approach, I think we’ll see consensus develop.—

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